CFTC said to weigh lower price-quote in Dodd-Frank swap rule

Quote requirement may drop from five to two

The U.S. Commodity Futures Trading Commission is considering reducing the number of price quotes a buyer must request before trading swaps under final Dodd-Frank Act regulations intended to boost transparency, according to three people briefed on the matter.

The five-member CFTC, led by Chairman Gary Gensler, is looking at cutting the number of quotes considered sufficient for interest rate, credit and other trades through so-called swap-execution facilities, according to the people who requested anonymity because the rule is still under consideration. The final rules may let buyers request two quotes in the first year and then require three starting in the following year, according to one of the people.

Commissioners are weighing a change after talks faltered late last year over a plan to require five quotes. JPMorgan Chase & Co., Deutsche Bank AG and other swap dealers have lobbied against the five-quote requirement, telling regulators that it is unnecessary and will increase trading costs and reduce liquidity on facilities using request-for-quote systems.

“Requiring portfolio managers to widely broadcast their trading position could negatively impact the prevailing price of their trades, making it more expensive and difficult to hedge their clients’ risk,” Tim Cameron, managing director and head of the asset management group at the Securities Industry and Financial Markets Association, said yesterday in a statement.

Quote Debate

The number of quotes required has been a central debate in discussions over implementation of Dodd-Frank requirements to have most swaps transacted on electronic or other platforms. The regulatory overhaul was enacted in 2010 after largely unregulated swaps helped fuel a credit crisis that led to the collapse of Lehman Brothers Holdings Inc. and a U.S. rescue of New York-based insurer American International Group Inc.

Steve Adamske, CFTC spokesman, declined to comment.

Five Wall Street banks dominate the U.S. swaps business with JPMorgan, Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Morgan Stanley controlling 95 percent of cash and derivatives trading for U.S. bank holding companies as of Dec. 31, according to the Office of the Comptroller of the Currency.

The financial firms that dominate swap dealing generate more than $30 billion in annual profit, according to an estimate from consulting firm Oliver Wyman, a unit of Marsh & McLennan Cos.

Reach Consensus

A vote on the rules has been delayed since late last year as commissioners struggle to reach consensus. The rule could still change before a final vote.

Bloomberg LP, the parent of Bloomberg News, has filed suit against the CFTC challenging one of the agency’s rules that impacts its planned Sef. Tradeweb LLC, ICAP Plc and GFI Group Inc. have also said they plan to register as Sefs.

Americans for Financial Reform, a coalition including the AFL-CIO labor federation as well as other unions and consumer groups, has opposed changes to the quote requirement.

“Reducing Sef requirements so that they could be fulfilled by an essentially bilateral transaction, which could involve just one or two RFQ counterparties, would nullify most of the intended benefits of the Dodd-Frank Act provisions on derivatives market execution,” the coalition said in a Feb. 27 letter to the CFTC.